Product And Services Management

and Swan and Rink (1982) identified eleven different product life cycle forms, while Kotler (2003) describes eight different PLC shapes. All in all, these authors postulate that product sales in a given time frame (for example, a year) do not necessarily follow an S curve, but can, for instance, go up and down quite sharply (for example, fad products), or follow a scalloped pattern, when sales pass through a success of life cycles based on discovery of new product characteristics, users or uses (for example, new uses have been added to 3G Cellular phones). 2 The changes in the company’s external environment as well as the demand of the product from one year to the other make it difficult for a company to predict when the next stage in the product life cycle will appear, how long it will last and what the levels of sales will be. 3 One cannot often judge with accuracy in which stage of the life cycle the product is. 4 The major stages do not divide themselves into clear-cut compartments. At certain points a product may appear to have attained maturity when actually it has only reached a temporary plateau in the growth stage prior to its next big upsurge. 5 The time-dependent PLC model is insufficient for two reasons: first, the PLC is partly endogenous – the long term pattern of sales is determined by the strategic decisions of management. Secondly, exogenous factors are not adequately modelled as random error around the time dependent PLC. Despite extensive criticism levelled at the product life cycle model, it remains a useful tool for planning the launching of new products, establishing price policies, planning the timed use of the marketing mix and undertaking cash flow and financial investment appraisal. In the remainder of this chapter, there is a detailed presentation of the alternative marketing strategies, which can be used for products and services at the various stages of their life cycle. Marketing strategies at the introduction stage When a company launches a totally new product/service on the market, it may select one of the following marketing strategies (Walker et al., 1999): • mass-market penetration; • niche penetration; • skimming and early withdrawal. Mass-market penetration This strategy aims at persuading as many potential customers as possible to adopt the new product/service in order to achieve a decrease in the unit cost and to create a large base of loyal customers before competitors enter the market. The ultimate objective of massmarket penetration is to capture and maintain a large market share for the new offering. Very often mass-market penetration can take the form of either slow penetration or rapid penetration strategy depending on the price set and promotion expenses made (Kotler, 2003): • Slow penetration strategy: the product/service enters the market at a low price and limited promotion expenses. The implementation of this strategy requires the existence of a large potential market which is highly aware of the product/service, that is price sensitive and further, there is some potential competition. 44 Product and services management

• Rapid penetration strategy: the product/service enters the market at a low price, despite high promotion expenses. In order to implement this strategy, a large potential market should be unaware of the product/service. Most potential customers should be price sensitive and there should be strong potential competition, while considerable economies of scale can be achieved with increases in production. In order for a company to use a mass-market penetration strategy, the following conditions must be present: 1 There is large potential demand. 2 Potential customers are price sensitive, therefore a low price can lead to market development. 3 There exist economies of scale. 4 Low pricing can discourage existing and potential competition. 5 The product/service life cycle is long. 6 There are product/service substitutes. 7 Barriers to market entry are practically non-existent. 8 Product technology is easily copied. 9 There are many potential competitors. 10 There are many sources of raw materials and components supply. 11 Product process is rather simple. 12 Potential competitors have rather limited resources or skills. 13 The company has extensive marketing, financial, product engineering skills and resources. A mass penetration strategy can be implemented using the following marketing mix tools: • rapid product line extensions to appeal to multiple segments; • low pricing or alternatively high pricing followed by lower-priced versions for facing potential competitors; • trade promotions and extended trade terms to encourage initial purchases and gain extensive distribution coverage; • sales promotions in the form of couponing, sampling and quantity discounts to generate initial retail purchases. Niche penetration When the company has limited resources it can strive to gain a leading position in a specific market segment. In other words, the company can aim at maximizing the number of customers that try and adopt the product/service, focusing its efforts in a particular niche market, instead of trying to gain and maintain a leader’s position in the total market. This strategy can help pioneering companies to make a more efficient use of their limited resources and avoid direct confrontation with larger competitors. As far as implementation is concerned, niche penetration requires similar tactics as the mass-market penetration strategy. The only difference is that, instead of extending the product/service line, the company must modify and improve its product/service in order to increase its attractiveness in the target market. According to Walker et al. (1999), the situations favouring a niche penetration strategy are as follows: Product life cycle and marketing strategy 45

• large potential demand; • fragmented market; • short adoption process; • product technology offers little patent protection; • many sources of raw materials and components; • relative simple production process; • many potential competitors; • some potential competitors have substantial resources and competences; • limited marketing, financial and product engineering skills and resources. Skimming and early withdrawal The skimming and early withdrawal strategy aims at attracting as many customers as possible and maintaining high profit margins. This can be achieved by setting high prices for recovering the product’s development and launching costs as quickly as possible in order to maximize ROI and then to exit the market as increasing competition push margins down. Depending on how high the price is set and the promotion expenses made this strategy can take one of the following forms (Kotler, 2003): • Rapid-skimming strategy: the product/service enters the market at a high price and with high promotion expenses. In order to select the rapid-skimming strategy there must be a small potential market, which is unaware of the product, not price sensitive and further the company faces potential competition and wants to create strong brand preference. • Slow-skimming strategy: the product/service is introduced at a high price, while promotion expenses remain at a low level. The implementation of this strategy requires the existence of a small potential market which is aware of the product/service, also buyers that are not price sensitive, and potential competition is not imminent. The conditions favouring the implementation of skimming and early withdrawal strategy are as follows: • There is limited potential demand. • The new product/service is targeted to innovators who wish to buy it just because it is new, without considering its price. • It is easier to lower the product’s/service’s price in the future than setting it higher. • The product’s/service’s high price, even with low sales, brings profit to the company which is necessary for covering its high R&D and marketing costs. • The production of the new product/service cannot increase immediately because one or more production resources are scarce (for example, specialized workforce). • The cost of a low volume production is high as to weaken the advantage of high price. • The initial high price does not attract more competitors in the market. • The high price promotes the message of a unique and superior product/service. • There are few potential competitors. • The product technology is patentable or difficult to copy. • There is a relatively complex production process. • There are limited sources of raw materials and components supply. • Some potential competitors should have considerable resources and skills. • The company possesses strong basic R&D and product development capabilities, as well as sales and promotion skills, but limited financial resources. 46 Product and services management

Marketing strategies in the introduction stage of PLC: the case of the mobile telephony market in Greece Telestet (now TIM) and Panafon (now Vodafone) are the two pioneering companies in the Greek mobile phone market. They started their operation almost simultaneously in the summer of 1993. Telestet was a subsidiary of the STET telecommunications group of companies with an international presence in the provision of information and telematics services. Panafon used to be a subsidiary of British Vodafone and France Telecom. The mobile phone services are technologically advanced services, which require considerable resources for telecommunications infrastructure and high specialization. For survival in this highly competitive market it is imperative for every company to upgrade its network on a continuous basis in order to operate efficiently and to provide high quality services to its clientele. There are certain market segments where demand is price inelastic (namely, innovators and early adopters). The legal framework of operation does not allow companies to compete in the same technology. The main potential competitor is the state-owned OTE, which is not allowed yet by law to enter the market. Both Telestet and Panafon possess adequate financial resources for expanding the telecommunications network and at the same time skills and experience in marketing, ensuring synergies with their parent companies. Further, they aim at maximizing their return on investment (ROI). Telestet, as well as Panafon adopt a rapid skimming strategy. In particular, they change premium prices in order to finance high investments in infrastructure nationwide, taking advantage of the oligopolistic conditions in the market. Premium pricing conveys the message of a unique and superior service, which adds prestige to the customer. It must be noted that during this period both companies forecasted a market growth, which was less than the actual ones. Moreover, they invest considerable amounts in advertising for service awareness, accelerating diffusion in market segment that are not sensitive to price, and to prepare the way for mass adoption. During this phase, both companies are not engaged in extensive promotion. Both Telestet and Panafon focus their efforts in expanding their network, and improving their quality of communication. Gradually, they develop some value added core services based on GSM technology. The marketing strategy of Panafon can be viewed as highly successful and efficient and, in a short time, it takes precedence over competition. Panafon’s strategy is differentiated from Telestet as follows: • It is the first to develop a client service, from the first day of its operation, ensuring a competitive advantage. This service is operated in a pioneering way for Greek standards, and it is real evidence of the priority the company gives to complete customer support. • Panafon adopts a quite efficient distribution strategy following on the suggestion of its parent company Vodafone. It built up its distribution channel through seven trade partners, with whom it signed contracts of exclusive distribution. These trade partners sell, support, price as well as collect (Continued) Product life cycle and marketing strategy 47

(Continued) bills. These partners are Citicom, Panavox, Radio Korasidis, Telecom, Q-Phone, Palmaphone, and Viafon. This strategy reduced bad debts and contributed to the reduction of operational costs. The sales force of trade partners made considerable efforts, which focused on innovators and early adopters. By contrast, Telestet signed an exclusive sales contract with Mobitel, which developed a nationwide sales network which was targeted to corporate clients and at the same time it developed a distribution network through Cooperation with dealers. Telestet reconsidered this strategy several years later, in 1997, having already lost a significant market share. Moreover, with considerable delay, it created a client service, in 1995. Source: Avlonitis and Nikiforaki (2000) Marketing strategies in the growth stage The marketing strategies for products/services in growing markets depend on whether the company is the market leader or market follower. Strategies for market leaders The basic marketing objective of a market leader is to maintain its market share. This means that the leading firm must first, avoid losing share from its current customers, and secondly, capture the largest part of sales made by new customers in the market. Data from the PIMS database, an acronym for a large scientific Profit Impact of Marketing Strategy project of Harvard Business School (Buzell and Gale, 1987), revealed that a large percentage of leaders face decreases in their market share. In fact, 45 per cent of leaders having market share over 50 per cent experienced losses in relative share. The company can follow various marketing activities, which have been proved to help a firm maintain its leading position. These activities can be grouped in five different strategies that the market leader may implement individually or in combination (Kotler and Singh, 1981). More specifically, these strategies are as follows: First, fortress or position defence strategy: The objective of this strategy is to increase satisfaction, loyalty and re-purchases of current customers by building on existing company strengths. Also, another objective is to attract those customers that have not adopted the product yet. The fortress or position defence strategy is more applicable when the following conditions are satisfied: 1 The market is relatively homogeneous. 2 The leading firm enjoys increased awareness and preference among existing and potential customers. 3 The leading firm has competencies and skills in crucial business functions like marketing, for building awareness, preference and satisfaction. 4 Competitors do not possess 2 and 3. Examples of marketing actions for implementing a fortress or position defence strategy include: emphasis on quality and product enhancement; positioning strategy that 48 Product and services management

stresses uniqueness and superiority of product features; reminder advertising; improving after sales service; emphasis on key account management; improving logistics. Secondly, flanker strategy: The objective of this strategy is to defend an exposed flank, which, in business terms, is translated into a weakness in the leader’s offering. More specifically, a follower may try to capture a leading share in a market segment with a differentiated product in a territory where the leader is not strong. In this case, the leader may develop a second brand, usually called flanker brand. The leader may develop a higher quality, higher-price brand (trading up strategy) or a lower quality, lower price brand (trading down strategy). An example of trading up strategy is Lexus of Toyota, while Mercedes used a trading down strategy with the introduction of A Class series. Thirdly, confrontation strategy: The leader confronts competitive offerings by improving its product, increasing its promotional efforts or lowering its prices. It must be noted, though, that a simple price decrease may actually result in shrinking margins, which does not help re-establishing a sustainable competitive advantage for the leader. Therefore, such a tactic must be well planned and combined with other marketing tactics as well. In general, the leader must invest heavily in improving its production facilities for putting down unit costs, and developing new products with superior features which represent better value for money. Fourthly, market expansion or mobile strategy: The leader defends its market share versus competitors by establishing strong market positions in different market segments. The conditions favouring the use of this strategy are as follows: fragmented markets with heterogeneous needs and wants, necessary company resources and expertise in product development and marketing. In order to implement a market expansion or mobile strategy the company must: • develop line extensions, new brands, or alternative product forms utilizing similar technology to appeal to multiple segments; • build specialized distribution networks for the more efficient access to specific users; • design multiple promotion campaigns for different segments (Walker et al., 1999). Fifthly, contraction or strategic withdrawal strategy: The leader may find it difficult to defend its market position in different segments, especially when the market is fragmented. In this case, the leading firm may either reduce or even stop its marketing efforts in some segments and focus on the most promising segments where it has or can create a sustainable relative advantage. Followers’ strategies A company that is characterized, as a follower in a market should aim at building a market share by increasing acquisition of some of the competitor’s customers as well as new customers. Data drawn from the PIMS database suggest that followers that increased their share compared to those that lost market share (Buzzell and Gale, 1987): • did not have significant differences in their prices; • increased the quality of their products relative to competition; • developed more new products, product-line extension or product modifications; • increased their marketing expenses faster than the market growth rate. Kotler and Singh (1981) suggest five strategies for followers in growing markets. We shall now look at them in more detail. Product life cycle and marketing strategy 49

Frontal attack strategy is often characterized by an all-out attack on the opponent’s territory (Hooley et al., 2004). In this sense, the aggressor attacks the opponent’s strengths. The frontal attack is applicable when: • the market is relatively homogeneous with few underserved segments; • there is one well-entrenched competitor; • existing customers do not have a strong brand preference; and • the company has more resources and capabilities than its main competitor. The marketing tools which can be used as part of a frontal attack strategy include development of superior products, more promotion and distribution expenditure than competitors, and better customer service to name a few. Flanking attack strategy aims to catch the defender off guard, as the aggressor attacks the opponent’s weaknesses. This strategy is applicable when: • the market leader or/and other major competitors hold a strong position in the primary segment; • the aggressor has less resources than the opponent; • no existing brand fully satisfies the needs of customers in at least one other segment. The marketing tools that can be used for implementing a flanking attack strategy include: developing a unique and superior product which satisfies the unmet customer needs by existing offerings; designing promotional campaigns to stimulate demand in an underserved segment; building appropriate distribution networks for accessing this segment. Encirclement strategy aims at launching a large-scale attack of the opponent on several fronts. Hooley et al. (2004) suggest two approaches to the encirclement attack: first, to attempt to cut off the competitor from its main suppliers and/or customers; secondly, to offer a unique and superior product or service compared to competitive offerings in the market. The necessary condition for implementing an encirclement strategy is that the market can be broken down in many smaller regional or applications market segments. In order to implement an encirclement strategy, a follower can use the following tools: developing product line extensions appealing to the needs and wants of customers in the underdeveloped segments; designing promotional campaigns to stimulate demand in the underdeveloped segments; building appropriate distribution networks for accessing the underdeveloped segments. Bypass or leapfrog strategy aims at avoiding the competitor’s main market and concentrating on new markets. According to Kotler (2003), there are three alternative approaches of a bypass strategy: first, diversifying into unrelated products; secondly, diversifying into new geographical markets; thirdly, surpassing existing products with new technologically advanced products (the so-called technological leapfrogging). The necessary conditions for implementing a bypass or leapfrog strategy are as follows (Walker et al., 1999): • the company has technological superiority relative to competitors; • the company can use this technology for developing an appealing product; • the company has the necessary marketing resources for promoting the product and persuading customers already committed to the specific technology that the increased benefits of the new product justify their decision to replace their current brand with the new one; • the company must operate in markets where replacement purchases are rather frequent. In order to implement a bypass or leapfrog strategy, a follower can use the following tools: develop a new generation of products with unique features which appeal to existing and 50 Product and services management

potential customers; sales promotion and comparative advertising to stimulate initial trial; product demonstrations from well-trained sales people. Guerrilla attack strategy aims at harassing the market leader by disrupting its plans and diverting some of its resources and attention. Guerrilla attacks are sudden and sporadic. This strategy is particularly effective when: 1 the market segment is rather small and weakly defended; 2 aggressor has limited resources. Such attacks can take the form of sales promotion schemes (for example, couponing, sampling); short-term price reductions; segment-specific advertising campaigns. Marketing strategies in the growth stage: the case of mobile telephony market in Greece The first profitable year for Panafon and Telestet was 1996. During the growth stage, both companies based their marketing strategy on high advertising expenditures, subsidizing mobile telephone purchases and provision of complementary offerings (for example, televisions, electrical appliances, etc.). The cost of acquiring a new customer was considerably high for Telestet and Panafon. Both companies, but especially Panafon, created strong distribution channels, which followed an offensive commercial policy. At this stage, Cosmote entered the market. Panafon’s marketing strategy Panafon is the market leader with a market share of 60% with the aim of maintaining its leading position in a growing market, it uses a combination of strategies, which aim at keeping existing customers and at the same time acquiring a larger share of the new customers market. More specifically: Implementing a fortress or position defence strategy, Panafon continues the expansion of its telecommunications network, and the improvement of its service quality. Moreover, it invests further in quality emphasis on customer service, marketing information systems and quality accreditation for its services. In addition, it broadens its product portfolio by adding new value-added services with the objective of increasing customer satisfaction and loyalty. The distribution strategy is quite successful. It continues further building up the distribution channel with new dealership agreements, aiming at the extensive presence in the mass market. What is more, in an attempt to take control of distribution, Panafon proceeds in the acquisition of various companies. Additionally, Panafon combines a fortress or position defence strategy with a market expansion or mobile strategy, following a sales strategy that is targeted to large corporate clients using its own sales force as well as the sales force of its Partners Panavox and Q-phone. This strategy allows the company to maintain and further extend its upper market. As far as promotion is concerned, Panafon keeps its advertising expenditures high, emphasizing its high quality of service, and leading position. In some cases, it uses comparative advertising for confronting Telestet, while it differentiates its strategy towards various market segments accordingly. Further, following a flanker strategy, first it develops economy programmes especially for large corporate clients, and secondly, it gradually (Continued) Product life cycle and marketing strategy 51

(Continued) begins to subsidize the purchase of mobile phones in order to encourage new purchases in segments which are more price sensitive. In this context, Panafon is occasionally engaged in promotional activities with the aim of gaining a larger share of the new subscribers’ market, and confronting respective competitive activities (confrontation strategy). In order to cope with Telestet’s competitive offerings that have been available earlier in the market, and to attract new price sensitive subscribers, Panafon combines flanker with confrontation strategy. As a result, it launches a second brand, Panafon à la carte (mobile telephony with a prepaid card), targeting the market with two more economical programmes. This strategy proved to be quite effective and soon, Panafon takes the lead in the market. Next, it enriches its prepaid card offering by launching two more packages, ‘à la carte junior’ (a package targeted to young customers) and ‘thrilos à la carte’ (a package targeted to Olympiakos FC fans) for attracting new subscribers (flanker strategy). Initially, Panafon underestimates Cosmote, which entered the market in April 1998 and delays enormously in reacting to its offensive strategy. Further, Panafon reduces its price list twice in a period of eight months in order to confront the offensive pricing strategy of Cosmote (confrontation strategy). In an attempt to cope with Cosmote, Panafon follows the same strategy and creates customer loyalty award schemes to discourage disconnections (confrontation strategy). Finally, using a market expansion strategy, Panafon expands its presence in the leased lines market with Panafon Link, which is targeted at large corporate clients. Telestet’s marketing strategy Telestet has a lower market share than Panafon, which makes it a market challenger. Its main objective is to increase its market share by gaining customers from competition and attracting new subscribers. For meeting this objective it combines various strategies. More specifically: Using encirclement strategy, Telestet is the first to design and offer pricing programmes aiming at attracting new subscribers, covering different customer needs, which are not satisfied up to that moment in time. This strategy is not considered successful as there are several pricing programmes in the market that cause confusion to the customers, instead of making buying decisions easier. For attracting new customers, Telestet makes a flanking attack to Panafon by gradually subsidizing the purchase of mobile phones, targeting market segments that are more price sensitive. In the context, it is occasionally engaged in sales promotional activities with the objective of acquiring a larger share of new subscribers. Advertising expenditures are high, but the result is not considered particularly successful. It uses comparative advertising in an attempt to gain a more favourable position than Panafon, emphasizing in various ways the superiority of its offer over competition (frontal attack). Moreover, Telestet follows a bypass strategy, as it launches first a number of value added services in order to attract new customers who seek augmented benefits, but also to motivate the users of mobile phones to replace their service packages with new superior offerings offered by the company. These services comprise voice dialling, voice mail, family and friends, roaming to prepaid card holders, which cover the needs of various market segments aiming at a differentiated positioning in relation to Panafon. 52 Product and services management

Furthermore, in order to confront the preference of early adopters of mobile telephony for Panafon’s services, Telestet is launching a flanking attack, by introducing in May 1997 ‘B-free by Telestet’ for the mass market, which is the first prepaid card service. This service is more attractive to those wishing to use their mobile phone less, and they are more price sensitive. However, Telestet manages to keep its lead in this market for a short time, as Panafon à la carte proves to be much more competitive. In addition, it seems to realize with some delay that exclusive distribution is a wrong strategy, breaking its exclusivity contract with Mobitel and signing new distribution contracts. After terminating its cooperation with Mobitel, it creates a chain of companyowned stores. At the same time, Telestet expands the distribution for mobile telephony with a card, aiming at an extensive presence, including points of sale like kiosks (the so-called ‘periptero’ in Greek), Kodak stores and ATMs of the National Bank of Greece (flanking strategy). What is more, just like Panafon, it underrates Cosmote and although it delays in reacting to its offensive pricing strategy, it reduces twice its price list in a period of seven months (frontal attack). Finally, Telestet copies, like Panafon, Cosmote’s customer loyalty programmes. Cosmote’s Marketing strategy Cosmote started its business operation with considerably unfavorable terms. Its telecommunication network had a limited geographical coverage and its distribution channel comprised OTE’s stores, which did not have suitable opening hours (they are open only in the morning), while their employees were not highly motivated. Having as an objective to build up its market share, Cosmote mades the following strategic moves: First of all, the use of DCS1800 technology for its telecommunication network proves the implementation of leapfrog strategy, since this technology has a unique competitive advantage over GSM900 (used by competition), regarding quality of transmission and other technical characteristics of the network. Furthermore, Cosmote gives priority to the expansion of its telecommunications infrastructure for achieving nationwide coverage. Relatively soon and despite the initial delays, it creates a telecommunications network with satisfactory coverage in terms of population and geography. The above actions are coupled with a frontal attack, as Cosmote offers its services in much lower prices than competition. Its pricing programmes are simple and easily understood. Its pricing strategy is quite successful. During the first year of its operation, Cosmote attracts new customers, basically among late adopters, that are price sensitive. After a while, it gains customers from competition, which is forced to respond accordingly. Cosmote spends less in advertising and mobile phone subsidy than competition, as an offset to the loss revenues due to reduced prices, and as a way to put down costs. However, the limited advertising budget does not allow the company to communicate effectively its geographical coverage losing significant customers. On the contrary, Cosmote devotes considerable resources for expanding its distribution channel. New trade partners are added, and a direct sales force is recruited for large corporate clients. It gradually introduces value-added services in the market and at the end of 1997 it launches Cosmocarta (a prepaid mobile phone card). These actions describe the flanking attack, which is made by the company. Additionally, it launches a frontal attack and by positioning against competitive offerings, it further reduces prices (1999) with the implementation of a pioneering (Continued) Product life cycle and marketing strategy 53

(Continued) pricing method, what is known as volume pricing (the more you talk, the less you pay). With the objective of maintaining its customers and reducing disconnections, Cosmote is the first to develop a customer loyalty plan offering a reduction in the fixed cost for the subscribers who stay with the company for more than a year. This action is soon copied by competition. At the end of this period, Cosmote’s strategy is proved to be quite effective. Telestet and to a lesser extent Panafon have witnessed considerable losses in their market shares to the advantage of Cosmote. Panafon maintains its leading position with a market share of 43 per cent, while Telestet is second with a share of 30 per cent and Cosmote is third with 27 per cent. Source: Avlonitis and Nikiforaki (2000) Marketing strategies at the maturity stage When a company is the leader in a mature market, it must aim at maintaining and protecting its market share. In this case, the marketing strategies that can be followed coincide with those in the growing markets. However, there are markets, which are characterized as mature due to the inability of the competing companies to offer products that satisfy customer needs. In such markets, a company can implement one or more of the following strategies in order to increase the total sales volume: • extensive penetration strategy; • use expansion strategy; • new market strategy. Extensive penetration strategy This strategy aims at converting current non-users to users in the target market. The conditions favouring the implementation of this strategy are the following: • there is a large number of non-users; • competitors hold relatively small market shares, and have limited resources; • the market leader has R&D and marketing skills for producing modified products of line extensions and also has the necessary promotion resources for stimulating primary demand among current non-users (Walker et al., 1999). The marketing tools that can be used as part of the extensive penetration strategy include, among others: increasing the value of the product by adding new features or services; enhancing distribution coverage through innovative networks; sales promotions in the form of couponing, tie-in sales and sampling. Use expansion strategy The main objective of this strategy is to expand the use of the product by current users. This can be achieved through the following three methods: 54 Product and services management

• increases in the frequency of use; • increases in the quantity used; • development of new product uses. Aaker (1998) proposes certain strategies that can be sought in each of these three methods. More specifically, the increases in the frequency of use can be obtained by first, providing reminder communications, secondly, positioning for frequent or regular use, thirdly, making the use easier or more convenient, fourthly, providing incentives, and fifthly, reducing undesirable consequences of frequent use. Moreover, the increases in the quantity used can be attained by first, providing reminder communications, secondly, using incentives, thirdly, affecting the usage level norms, fourthly, reducing undesirable consequences of increased use level, and fifthly, developing positive associations with use occasions. Also, the development of new product uses can be accomplished through using the product first, on different occasions, secondly, at different locations, and thirdly, for different purposes. New market strategy This strategy aims at serving yet unreached segments. This strategy can take the form of geographic expansion, by targeting another region within a country or even expanding operations to other countries. Apart from geography, other criteria can also be used for define a new market like for example age (for example, Kinder chocolate is now targeted to parents as well as children) and distribution channel (for example, HSBC targets interactive digital television, ‘idTV’ users, apart from traditional bank branch customers). There are certain conditions under which the new market strategy is highly applicable, namely: • certain regions are underserved; • the market can be segments using a variety of segmentation criteria; • the market leader has sufficient resources to cultivate underdeveloped new market segments; • competitors have insufficient resources to preempt underdeveloped segments. Some marketing tactics, which can be used as part of the new market strategy, include among others: line extensions especially developed with new features for regional or applications segments; advertising and sales promotions emphasizing product features and applications; distribution networks that allow access to the underserved segments. Marketing strategies in the maturity stage: the case of the mobile telephony market in Greece By the year 2000, more than half of the potential customers are using mobile phones. The passing of the mobile telephony market from growth to maturity is marked by a significant reduction in the average monthly fixed cost of mobile telephony, and a significant decrease in service differentiation, increased competition, further price reduction, and the development of new value-added services with the objective of differentiating its offering, extending use and consequently revenues. (Continued) Product life cycle and marketing strategy 55

(Continued) It is noted that, according to estimations WAP and GPRS Internet-related technologies will extend the life cycle of the mobile telephony market. During the first semester of 2000, Cosmote surpasses Telestet and reaches the second place, while Panafon remains first, though having considerable losses especially in the new subscribers market. All three companies aim at expanding the market further. The strategies followed are as follows: • They follow extended use strategies of mobile phones by launching new value-added services, which are based on WAP technology. • Panafon adopts an increased penetration strategy by introducing the CU prepaid card service that is targeted to youngsters, aged 15–25. • Having as an objective to increase the amount of service used by the average customer, they continue their effort of further expanding the distribution network, especially for card-related services by signing contracts with large supermarket chains. • Telestet introduces a new pricing scheme. According to this scheme as the duration of a call increases, its price falls accordingly. It must be noted, though, that such a tactic is aimed more at making an impression, since the average duration of a call does not exceed 60 seconds. • Panafon is late to realize that offering several different pricing programmes causes customer confusion, and therefore it eliminates its programmes, replacing them with new ones copied from competition. • Panafon aims at exploiting better its telecommunications network. For achieving this objective, it enters the data transmission market, offering Internet provider services, frame relay services, and leased line services through its Panafonet Company. • Telestet launches the B-best service, offering complete telecommunication solution for corporate clients, like leased lines and virtual private networks (VPN), and so on. • Cosmote makes similar moves, offering advanced B2B value-added services, like VPN, and so on. • Finally, Cosmote follows a market expansion strategy by acquiring the Albanian mobile telephony company AMC, where mobile telephony is at the introduction stage of its life cycle. Source: Avlonitis and Nikiforaki (2000) Marketing strategies in the decline stage The final stage of a product’s life cycle refers to its decline. Although a declining market is not particularly attractive, under certain circumstances, a market in decline can be relatively attractive. Harrigan and Porter (1983) have identified three groups of factors that can be used to determine the attractiveness of a market, namely: 1 demand conditions; 2 ease of market exit; 3 competitive rivalry. 56 Product and services management

A declining market can be characterized, for example, as highly attractive when the following conditions occur. In terms of demand conditions are concerned: speed of decline is slow; predictability of decline is certain; there are several market niches; there is extensive product differentiation; premium pricing is followed; prices are stable. As far as ease of market exit is concerned: assets are fully depreciated; there is little excess capacity; there is limited vertical integration; and no re-investing. Regarding competitive rivalry; there are high switching cost and limited customer bargaining power. All in all, a company in a declining market can use the following five strategies (Harrigan, 1980; Aaker, 1998): • profitable survivor strategy; • milking or harvesting strategy; • hold strategy; • niche strategy; • divesting or exit strategy. Profitable survivor strategy This strategy is considered as most appropriate for market leaders in declining markets that may invest in such markets in order to strengthen further their competitive position. This can be achieved by encouraging competitors to exit the market. The market conditions favouring the implementation of a profitable survivor strategy are as follows: • Market decline is inevitable, but it will occur at a rather slow and steady rate. • Pockets of enduring demand continue to exist. • Barriers to exit are low and can be further reduced by the firm’s intervention. • The company has the resources to afford a deliberate rise in the costs of competing for encouraging competitors to exit the market. The following marketing actions can be considered part of a profitable survivor strategy: launch product line extensions, price reduction, increased distribution coverage, increased promotion. Milking or harvesting strategy This strategy aims at maximizing returns, even at the expense of market share. The conditions supporting the implementation of this strategy are as follows (Aaker 1998; Walker et al., 1999): • The decline rate is pronounced and unlikely to change, but not excessively steep. • Pockets of enduring demand ensure that the decline rate will not suddenly become precipitous. • Competitive rivalry is not expected to be intense. • The price structure is stable at a level that is profitable for efficient firms. • The company’s market position is weak, but there is enough customer loyalty, perhaps in a limited part of the market, to generate sales and profits in a milking mode. • The market is not central to the current strategic direction of the firm. The harvesting strategy presupposes avoiding additional investments and reducing operational costs. More specifically, this strategy requires: Product life cycle and marketing strategy 57

• considerable reduction in advertising, sales promotion, as well as trade promotion costs; • sales force efforts directed to maintaining repurchases from current customers; • reduction in production costs; • maintaining or even increasing prices to increase margins. Marketing strategies in the decline stage: the case of a medium-sized cosmetics firm Over the years, various companies have followed the harvesting or even the profitable survivor strategies and they had managed to improve their profitability. One such example refers to a Greek medium-sized enterprise operating in the cosmetics market. Among other products this firm had unpacked eau de cologne. This product is targeted at older people, with medium to low incomes. The product showed continuous decline for seven successive years (in 1994: sales totalled 95 million drachmas or £175,000; in 2000: sales totalled 57 million drachmas or £104,000). Competition is not particularly intense despite the fact that recently there are many imitations in the market. Basically, these products come from small firms, which produce hair salon products. The company of our example remains leader in a declining market and two alternative strategies can be used: harvesting and profitable survivor. The strategy selected is the profitable survivor strategy, which was implanted through: • concentrating part of the selling effort to acquiring customers from competition; • launching product line extensions with new types of unpacked eau de cologne for attracting the remaining market segments; • continuing R&D activities at a product level, improving the functional characteristics of the jars containing the eau de cologne; • maintaining prices at the same level. Hold strategy This strategy aims at maintaining market share, even if that causes a reduction in profit. Conditions favouring the implementation of the maintenance strategy include: • The market lacks growth potential. • Market conditions are not expected to change dramatically. • Pockets of enduring demand still exist. • Competitive rivalry can not be accurately predicted. • There are no significant price pressures. • The company holds a relatively strong position in the market. A company that has decided on the maintenance strategy must do the following: • maintain R&D expenses; • focus promotion efforts on maintaining repeat purchases; • reduce prices if necessary. 58 Product and services management

Niche strategy The objective of this strategy is to strengthen market position in one or few promising segments. The conditions favouring the implementation of a niche strategy are as follows (Walker et al., 1999): • The market declines quickly, but one or more segments will remain as demand pockets or decay slowly. • There are one or more strong competitors in the mass market, but not in the target segment. • The company has a sustainable competitive advantage in the target segment, but all in all its resources are limited. In order to implement a niche strategy, the following marketing actions may be considered: improving product to make it appealing to the target segment; focus promotion (namely, advertising, personal selling, sales promotion, public relations) on the customers of the target segment; keep appropriate distribution coverage. Divesting or exit strategy When market attractiveness is particularly low, a company may seriously consider exiting the market. The conditions favouring a divesting or exit strategy are the following (Aaker, 1998): • The decline rate is rapid and accelerating. • No pockets of enduring demand are can be accessible anymore. • The price pressures are expected to be extreme, caused by determined competitors with high exit barriers and by a lack of brand loyalty and product differentiation. • Few dominant competitors have achieved sustainable advantage. • The firm’s strategic direction has changed, and the role of this market is peripheral or even unwanted. • Exit barriers can be overcome. Summary • Despite the criticism the product life cycle (PLC) model has received, it remains a useful tool of strategic planning. • Depending on the stage of the product’s life cycle, different marketing strategies must be pursued. • The most appropriate marketing strategies also depend on whether the company is a market leader or follower. • The market characteristics, marketing objectives, marketing strategies as well as marketing tactics of each stage in the PLC are summarized in Table 3.1. Questions 1 Select three products or services you have bought lately and list the product-related decisions that should have been taken depending on their product life cycle stage. 2 Give two examples of products that do not follow the S-curve life cycle model. Product life cycle and marketing strategy 59

Decline Negative Decreasing profitability Laggards Steadily diminishing Limiting expenses • Profitable survivor • Hold • Milking or harvesting • Niche • Divesting or exit Maturity Stable Decreasing profitability Late majority Decreasing Maintaining market share Strategies for maintaining market share: • Fortress or defence position • Flanker • Confrontation • Market expansion • Contraction or strategic withdrawal SttiffththTheoretical model Stage characteristics • Market growth rate • Financial outcomes • Customers • Competition Marketing objectives Marketing strategies Introduction Moderate Loss Innovators Limited Encouraging demand • Rapid skimming • Slow skimming •RapidpenetrationGrowth High Increasing profitability Early adopters and early majority Increasing Building market share Market leader’s strategies: • Fortress or defence position • Flanker • Confrontation • Market expansion or mobile • Contraction or strategic withdrawal Market follower's strategies: FtlttkTable 3.1 Summary of stage characteristics, marketing objectives, strategies and tactics over the product life cycle

Offer minimization Withdrawal Price reduction Selective Reduction to necessary level for maintaining loyal customers Minimization Strategies for further growth: • Extensive penetration • Use expansion • New market Differentiation Maintaining brands and models Maintenance or selective reduction Intensive Decreasing expenses Emphasis on differential benefits Increase with the aim of encour- aging brand switching ggMarketing tactics • Product • Price • Place • Advertising • Promotion Rapid penetration • Slow penetration Core product, emphasis on quality High/Low Selective High expenses Building awareness early adopters and channel members Limited • Frontal attack • Bypass or leapfrog • Flanking • Encirclement • Guerrilla attack Improvements in quality, line extensions, warranties, customer service Aiming at penetration Building distribution channels-intensive High expenses Building awareness in the mass market Decrease with the aim of exploiting increasing demand

3 Why should the marketing strategies of the leaders be different from the marketing strategies of the followers over the product life cycle? 4 A pension scheme is in a high growth rate market, with increasing profitability, increasing competition, and targeted to early adopters. Discuss the alternative marketing strategies and tactics for this service. References Aaker, D. (1998) Strategic Market Management, 5th edition. Chichester: John Wiley & Sons. Avlonitis, G. and Nikiforaki, L. (2000) ‘Marketing strategies over the product life cycle: The case of mobile telephony in Greece’, Working Paper, Athens University of Economics and Business. Buzzell, R. and Gale, B. (1987) The PIMS Principles: Linking Strategy to Performance. New York: The Free Press. Cox, W. (1967) ‘Product life cycle as marketing models’, The Journal of Business: 375–84. Dhalla, N.K. and Yuspeh, S. (1976) ‘Forget the product life cycle concept’, Harvard Business Review: 102–110. Doyle, P. (1976) ‘The realities of product life cycle’, Quarterly Review of Marketing): 1–6. Flides, R. and Lofthouse, S. (1975) ‘Market share strategy and the product life-cycle: a comment’, Journal of Marketing: 57–60. Harrigan, K. (1980) ‘Strategies for declining industries’, Journal of Business Strategy: 27. Harrigan, K. and Porter, M. (1983) ‘End-game strategies for declining industries’, Harvard Business Review: 117. Hooley, G., Saunders, J. and Piercy, N. (2004) Marketing Strategy and Competitive Positioning. Harlow: Pearson Education Limited. Kotler, P. (2003) Marketing Management: Analysis, Planning, Implementation and Control, 11th edition. Englewood Cliffs, NJ: Prentice Hall. Kotler, P. and Singh, R. (1981) ‘Marketing warfare in the 1980s’, Journal of Business Strategy: 30–41. Rink, D. and Swan, J. (1979) ‘Product life cycle research: A literature review’, Journal of Business Research, 219–242. Swan, J. and Rink, D. (1982) ‘Effective use of industrial product life cycle trends’, in Marketing in the ’80s, Proceedings of the American Marketing Academy Conference, pp. 198–9. Walker, O., Boyd, H. and Larreche, J. (1999) Marketing Strategy: Planning and Implementation. Irwin: Mc-Graw Hill. Further reading Aaker, A. and Day, S. (1986) ‘The perils of high-growth markets’, Strategic Management Journal, 7: 409–21. Anderson, C. and Zeithaml, C. (1984) ‘Stages in the product life cycle, business strategy, and business performance’, Academy of Management Journal, March: 5–25. Doyle, P. (1995) Product life cycle management, in M.J. Baker (ed.), The Companion Encyclopedia of Marketing. London: Routledge. Treacy, M. and Wiersema, F. (1995) The Discipline of Market Leaders. Reading, MA: Addison-Wesley. Product life cycle and marketing strategy 61

Introduction One of the main marketing activities of a company is the evaluation of its existing products/services so as to achieve an allocation of resources (financial, production, marketing, and so on) that leads to maximizing future returns for a given risk level. In this sense, evaluating a company’s existing products/services is a vital activity since it provides critical information for decision-making, which ensures survival and further development of the company. These decisions may refer to new product/service development, modification and/or elimination of existing products/services and allocation of the company’s resources among different products/services and markets. For evaluating product/service portfolio, one or more approaches can be used. In this chapter, the following questions that are related to these approaches are addressed: • What is the multidimensional ‘screening’ approach? • What is the index approach? • What is the product portfolio classification/matrix approach? In this chapter, these approaches are presented in detail. Special emphasis is given to the product portfolio/matrix approach and particularly to the financial and non-financial models that have been developed as part of this approach. Multidimensional ‘screening’ approach This approach, which was developed about five decades ago, advocates a systematic review of the product line in which every product is subject to performance evaluation on a number of key performance dimensions/criteria (for example, sales volume, profitability, market share). In Table 4.1, we provide the ‘screening’ dimensions/criteria and the procedures proposed. ‘Index’ approach According to the ‘index’ approach, there is a routine evaluation of product performance on a number of key dimensions/criteria, which is summarized in a single overall performance index. Table 4.2 presents the main indices that are available in the literature. 4 Evaluation of Product/Service Portfolio

Evaluation of product/service portfolio 63 Author Houfek (1952) Sonnecken and Hurst (1960) Alexander (1964) Kotler (1965) Eckles (1971) Worthing (1971) Kratchman et al. (1975) Proposed ‘screening’ criteria Sales value, composite costs (direct materials and labour; variable overhead; marketing costs). Profitability, product-line scope, marketing efficiency, production efficiency, cost/price, value/ quality, service, competition. Price trend, profit trend, substitute products, product effectiveness, executive time. Share of company sales, sales decline, market decline, gross margin, product’s coverage of overhead. Inventory requirements, past sales volume, future sales volume, profit margin, competitive activity, total generic demand trend. ROI (product’s profit as a percentage of its production and marketing costs), profitability (product’s profit as a percentage of its sales value), sales volume (product’s sales as a percentage of company sales). Development costs, variable expenses, past unit sales, sales revenues, sales revenues of competitive products, unit sales of competitive products, current and past pricing structure, inventory turnover, competitive pricing policies, executive man hours, future sales volume. Procedural approach Suggests that weak products should be identified on the basis of their incremental profit, which is the difference between their sales value and composite costs. Propose that weak products should be identified on the bases of these criteria which management should carefully consider in conducting a periodic product-line audit. Advocates a systematic and periodic search for elimination candidates on the basis of these criteria and provides an additional, in-depth analysis of situations and opportunities regarding candidates for elimination. Proposes a computer-aided product review system, which consists of a creation stage and six operational steps. The identification of ‘dubious’ products is the objective of the first two operational steps in which product data sheets containing information pertinent to the proposed criteria are screened by means of a computer program. Suggests a four-state approach to product elimination. The first state is a monthly review of each product along the proposed criteria. The products identified as candidates for elimination at state 1 are subject to further analysis in states 2, 3 and 4 to determine their elimination/retention status and the timing of their elimination. Proposes a computer-aided two-phased product evaluation procedure. The first phase (Program SCREEN) identifies those products whose performance along the proposed criteria is worse than that of the previous year. These products are subject to further evaluation in the second phase (Program MODROP) to determine their elimination/retention status. Suggest the transformation of these accounting-based ‘screening’ criteria into ‘warning signals’; that is, indication as to whether a product should be considered for elimination. They also propose the establishment of minimum standards of performance for these ‘warning signals’ which should be computerized so that any product failing to meet any standard can be ‘red-flagged’ as soon as possible. Table 4.1 The multidimensional ‘screening’ approach (Continued)

64 Product and services management Author Browne and Kemp (1976) Proposed ‘screening’ criteria Sales volume, profitability, ROI, cost and availability of raw materials, average order size, rate of market penetration, number of sales calls required per sale. Procedural approach Advocate a three-stage product review system. The first stage is basically a product-line monitoring system, which uses the proposed criteria to identify weak products as candidates for elimination. The products identified at this stage are evaluated in much greater depth in the following two stages to determine their elimination/retention status. Table 4.1 (Continued) Table 4.2 The ‘Index’ approach Author Proposed framework Proposed action Weight Add the the weights factors Berenson Factors affecting financial Act on ΣV (1963) security V1 Factors affecting financial i If ΣV is approximately opportunity X1 take action A1 V2 Factors affecting marketing ii If ΣV is approximately strategy X2 take action A2 V3 Factors affecting social iii If ΣV is approximately responsibility X3 take action A3 V4 Factors affecting organized iv If ΣV is approximately intervention X4 take action A4 V5 Clayton (1966) SURVIVAL SCORE INDEX (SSI) = A × B × C × (D – E) × F If SSI > 1 the product G + H + I should be retained in the line where: A = % chance of product If SSI > 1 the product meeting is ROI goal should be dropped B = % chance of continued sales success from the line C = Projected sales volume – units/year D = Sales price/unit E = Manufacturing costs/unit F = Remaining market life (1–5 years) G = R&D costs to continue product line H = Process and product engineering costs to continue product I = Marketing costs to continue product line ΣV

Product portfolio classification/matrix approach The third approach of evaluating a company’s existing products/services advocates the joint consideration of a number of key product performance dimensions which leads to the development of a product portfolio classification/matrix scheme. When using this approach, the company examines combinations of products/ markets taking into consideration its strengths and the opportunities for high financial returns, which arise in the changing external environment. A basic characteristic of the product portfolio classification/matrix approach is that it supposes that the company manages a portfolio of products/services that: Evaluation of product/service portfolio 65 Hamelman and Mazze (1972) PRESS 1 – Primary model Inputs (per product) Materials cost Labour cost Variable overhead Sales price Quantity sold/period Sales and admin charges Manufacturing runs/period Outputs a Performance ratios: % expressions of how much labour and variable overhead become available should product be dropped. b Selection Index Numbers – SIN SINi = (CMi /ΣCM2 (FCi /ΣFC) where: CMi = contribution margin for product i ΣCM = summation of contribution margin for all products FC = facilities cost for product i ΣFC = summation of facilities costs of all products The products with the lowest SIN numbers are the most promising candidates for elimination. These products are subject to further evaluation through the supplemental models PRESS II, III and IV to examine the effects due to price changes, sales growth trends and product complementarity/ substitutability factors, respectively. The revised SIN listing of products produced is used by the PRESS IV model which, starting with the products with the lowest SIN numbers, eliminates products one at a time till a reduction in a cost element, previously specified, is reached. Table 4.2 (Continued) Author Proposed framework Proposed action

1 are in different stages of their life cycle; 2 have their own special contribution to the prosperity and financial performance of the company and therefore, 3 require different marketing strategies. The pioneering portfolio theory of Nobel laureate H. Markowitz (1952) in the field of financial management formed the basis for developing product portfolio management models. Markowitz defines ‘portfolio’ as the combination of investments (for example, stocks, bonds, cash, and so on), with various levels of risk and return. According to his theory, national investors select efficient portfolios, that is portfolios that maximize the expected return for a given risk level or alternatively minimize the risk for a given level of expected return. However, the criteria of return and risk which are used in financial management are not good enough for the marketing manager who also needs to base its product/service portfolio’s evaluations on market-related criteria as well. Therefore, in the late 1960s models of product/service portfolio evaluation appeared in the literature, which incorporated both market and not market-related criteria. These models, which are expressed in the form of matrices, are based on criteria such as market share, profitability, competitive position, market growth rate, and so on. What criteria will ultimately be used depends on the company’s resources, markets, competitive position and objectives. However, the usefulness of a product/service portfolio matrix depends on its relative simplicity. The larger the number of criteria used, the more difficult is the collection of the necessary data. Before proceeding with the presentation of the product portfolio classification/matrix models it must be pointed out that such an evaluation can be made on a product line, product mix or strategic business unit level, depending on the structure and size of the company. Non-financial models of product portfolio Product classification by Peter Drucker The initial idea of classifying products for resource allocation reasons belongs to Peter Drucker (1963), who proposed that products tend to be classified in six categories: • ‘Tomorrow’s breadwinners’: new products or ‘today’s breadwinners’ modified and improved, already profitable with large market and wide acceptance, much more growth ahead without substantial modification, most companies ought to have at least one of these around. • ‘Today’s breadwinners’: the innovations of yesterday, substantial volume large profit earners. They still have more potential growth ahead after modification or change in design, promotion or selling methods. • Products capable of becoming net contributors if something drastic is done, for example, converting a good many buyers of ‘special’ variations of limited utility into customers for a new, massive ‘regular’ line. • ‘Yesterday’s breadwinners’: typically products with high volume, but badly fragmented into ‘specials’, small orders, and the like and requiring such massive support as to eat up all they earn plus plenty more. Yet this is – next to the category following – the product class to which the largest and best resources are usually allocated. • ‘Also rans’: typically the high hopes of yesterday that, while they did not work out well, nevertheless did not become outright failures. These are always minus contributors, and practically never become successes no matter how much managerial and technical ego involved in them to drop them. • ‘Failures’: these rarely are a real problem, as they tend to liquidate themselves. 66 Product and services management

Having categorized products into groups, Drucker proceeds to propose that the ranking of these six groups suggests the line that decisions ought to follow. To begin with, the first category should be supplied the necessary resources and usually a little more than seems necessary. Next, ‘today’s breadwinners’ ought to receive support. Of the products capable of becoming major contributors, only those should be supported which have either the greatest probability of being reformed successfully or would make an extraordinary contribution if the reform were accomplished. The lower half of the third group and also groups four, five and six either have to produce without any resources and efforts or should be allowed to die. ‘Yesterday’s breadwinners’ for instance, often make a respectable ‘milk cow’ with high yields for a few more years. To expect more and to plough euros into artificial respiration when the product finally begins to fade is just plain foolish. Although Drucker’s model is a valuable tool for evaluating product portfolios, it is far from a complete synthesis of the underlying analyses and judgements as to the product’s position within the company’s activities and in the market where it competes. Product classification by Fluitman A somewhat similar classification to that of Drucker has been suggested by Fluitman (1973). He argued that a company could use four dimensions for evaluating its product portfolio, namely: sales volume, average annual growth rate, utilization of key resources, and return on investment (ROI). On the basis of these dimensions, products within a company’s portfolio can be classified into the following eight categories: • failures; • products of tomorrow; • products of today; • investments in managerial ego; • sleepers; • fade out products; • specialties; • yesterday’s products. Management should classify all its products along the recommended dimensions. ‘Failures’, ‘investments in managerial ego’, ‘fade-out products’ and ‘yesterday’s products’ which account for a low percentage of the company’s sales turnover, experience zero growth, absorb a high percentage of the company’s resources and exhibit negative profitability, should be considered as candidates for elimination. Resources should be taken to cut down such products in order to allow the company to achieve its profit objectives and to pay more attention to the ‘bread and butter’ products of today and tomorrow, which guarantee the continuity of the company. Our comments regarding Drucker’s classification apply equally to Fluitman’s classification. Market growth – market share matrix by Boston Consulting Group The multinational consulting firm Boston Consulting Group (BCG) has developed a strategic model for companies with many products in different markets (Boston Consulting Group, 1976). This model is known as the ‘market growth-market share matrix’ (Figure 4.1). According to this BCG model, company products/services can be classified in four categories depending on the rate of market growth and the relative market share of the product/service. Evaluation of product/service portfolio 67

More specifically, the market growth rate in the vertical axis represents how the market grows annually from 0 per cent to 20 per cent. A market growth rate above 10 per cent is considered high. The relative market share in the horizontal axis represents the market share that the company’s product possesses compared to its main competitor. A relative market share of 0.2× means that the product’s sales are only 20 per cent of sales of the main competing product, while 4× means that the company’s product is the market leader having four times the market share of the next stronger competing product. In the BCG model, the market growth rate represents an approximate estimation of the product’s life cycle (and therefore, its attractiveness), while the relative market share reflects the product’s market performance (and, therefore, its position in the market). It must be noted that, a third criterion is also used which refers to the product’s contribution to the overall sales of a company. In Figure 4.1, the circles represent the four products of a hypothesized company. The size of the circle is analogous to the sales achieved by the respective product in relation to the overall company sales. The basic characteristic of the BCG matrix is its simplicity. The matrix attempts to accommodate the complexities of a company’s product portfolio in a graphical representation by using only three criteria/variables. The products of each of the four categories have different names like stars, cash cows, problem children or question marks and dogs. These categories present different cash flows and are related to different marketing strategies. More specifically: 68 Product and services management STARS QUESTION MARKS CASH COWS DOGS 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Market growth rate 3 4 2 1 Relative market share 10× 4× 2× 1.5× 1× 0.5× 0.4× 0.3× 0.2× 0.1× ? ? Figure 4.1 The BCG matrix Source: Boston Consulting Group (1976); Hedley (1977)

• ‘Stars’ (high market growth/high relative market share): products categorized as stars are leaders in fast growing markets. Despite the fact that these products are profitable, their cash flows are negative. This is because they require considerable resources for financing their rapid growth and facing competition usually through price reductions. High growth markets attract many companies and the battle is usually focused on acquiring new customers and developing new application for the stars. Strategies for stars can be summarized as follows: first, protecting the existing market share, secondly, re-investing cash flows (profits) for price reductions, product improvements, better market coverage and enhancing product efficiency, thirdly, acquiring a larger share of new customers. • ‘Cash cows’ (low market growth/high relative market share): As indicated by their name, these products, which are at the maturity stage of their life cycle, are the company’s cash generators. Their strong competitive position allows them to enjoy economies of scale and high profit margins in low growth markets that do not require considerable financial resources. Hence, ‘cash cows’ provide cash flows that are much more than those needed for re-investment in R&D, market research and promotion. These positive cash flows can be used to support the other product categories of the portfolio especially ‘question marks’. Strategies that can be followed for ‘cash cows’ are summarized as follows: first, maintaining their leading position in the market, secondly, investing for enhancing their production process and creating technological leadership and thirdly, maintaining price leadership. • ‘Problem children’ or ‘question marks’ (high market growth/low market share): these products have low market share in high growth markets. They require significant financial resources in order to remain competitive, while their profit margins are limited. Most products start as ‘question marks’ as the company tries to enter an attractive high growth market where there exists a market leader. The term ‘question mark’ for these products is quite successful, as the company has to decide whether it will commit significant financial resources for achieving a leading position in the market or exit the market despite its attractiveness. The strategies, which can be used for ‘problem children’ or ‘question marks’, are as follows: first, investing considerable financial resources for building market share, secondly, building market share through acquisition of competitive companies, thirdly, de-investing through selling the product to another company, fourthly ‘harvesting’ which results in the maximization of cash flows through decreases in investments and promotion expenses, fifthly, segmentation and niching strategy in a market where the company can establish a strong position, lastly, product elimination. • ‘Dogs’ (low market growth/low market share): these products are weak and unattractive, as they possess a low market share in low growth markets. They are usually at the maturity or decline stage of their life cycle. They are often called ‘cash traps’ because they normally require more financial resources than those they generate in order to maintain their competitive position in the market. The strategies of divestment, ‘harvesting’, segmentation and eliminating which can be applied in ‘question marks’ can also be used in the case of ‘dogs’. According to the BCG matrix, the main objective of the company should be the creation of a balanced product portfolio, which will include as few ‘dogs’ as possible, a moderate number of ‘question marks’ and ‘cash-cows’, and as many ‘stars’ as possible. Criticism of the BCG matrix Despite the importance of the BCG matrix for evaluating product portfolios, it is not free of weaknesses, which should not be ignored. More analytically: Evaluation of product/service portfolio 69

• The rate of market growth is not the only criterion for measuring market attractiveness. Further, negative growth rates, although possible, are not considered. • The relative market share is not the only criterion for defining a product’s competitive strength of market position. • The BCG model presupposes that there is a positive relationship between relative market share and product profitability. This assumption has been heavily criticized (Wensley, 1981; Jacobson and Aaker, 1985; Morrison and Wensley, 1991). For example, in the case of ‘cash cows’ the model hypothesizes that because of their high relative market share they are ‘cash generators’ that can finance ‘question marks’ and ‘stars’. However, this is not always true as there are companies that are unable to control their costs and despite increased sales, the product’s profitability remains low. • This model simply suggests the reallocation of resources among products, without presenting information about market sizes, and the resources required. For example, a ‘cash-cow’ may compete in a small size market and consequently, the high sales or large market share achieved, may not be enough for financing the necessary marketing activities of a ‘question mark’ which competes in a market five times the size of the ‘cash-cow’. All in all, the Boston Consulting Group Matrix is a tool of a preliminary evaluation of product portfolios that allows the company to combine graphically three types of information, namely market growth rate, relative market share, and percentage of product sales on total company sales. This information is certainly necessary for decisionmaking. Nevertheless, it should not be considered as sufficient for achieving a rational allocation of business resources to the various company products. Product profitability grid by Philip Kotler Kotler (1974) developed what he termed the ’product profitability grid’ where each product is plotted in terms of its rates of return on investment (ROI) and sales growth, which are two useful dimensions for judging the long-term profitability of a company’s product (Figure 4.2). The grid is further divided into three parts, reflecting management’s view of strong, satisfactory and weak products. The best products are those strong in both sales growth and current return on investment. But management also considers products strong if they have an exceptional sales growth rate or return on investment. The dividing line between strong products and satisfactory products, and between satisfactory products and weak products reflects the trade-off between these two dimensions in management’s mind. Any products that show up as weak can be checked for their behaviour over time. The typical product shows a life cycle trajectory similar to that shown in Figure 4.2. Although Kotler’s ‘product profitability grid’ is theoretically sound, it overlooks important marketing variables, including that of market share, which is necessary for the identification of the product as a candidate for elimination. In fact, a product’s market share assists management to determine whether a downward trend in sales growth and return on investment reflects a fundamental change in the environment or is merely due to temporary fluctuations. Furthermore, the consideration of a product’s return on investment and sales growth in terms of the standard concept of the product life cycle introduces some additional practical problems. In fact, there is clear evidence that while most products do follow a broad life cycle pattern, the product life cycle itself is insufficiently uniform to provide a rational basis for prediction and therefore, for product planning. 70 Product and services management

Product evaluation matrix by Wind and Claycamp Another model for evaluating products is the ‘product evaluation matrix’ proposed by Wind and Claycamp (1976). According to this model, the product is evaluated on the basis of profitability, product sales, industry sales and market share. These researchers propose an approach for making strategic product/market decisions with two definitional phases and five analytical stages. At the first two stages of analysis, the past and present strategic position of each product is determined through the integration of the four dimensions into a product evaluation matrix. At succeeding stages, the performance of each product is presented for alternative marketing strategies based on key assumptions about competition and other external influences. The product performance matrix allows the marketer to systematically address two basic questions: ‘Where are we now?’ and ‘Where should we go from here?’. Overall analysis reveals strong performers as well as candidates for remedial action of some kind or elimination. Wind and Claycamp (1976) identify five strategies that might be appropriate for a particular product, or for an entire line of products, depending on market conditions, for example, market size, competition, customer needs and so on. These strategies are as follows: 1 maintain the product and its marketing strategy in the present form; 2 maintain the present form of the product, but change its marketing strategy; 3 change the product and alter the marketing strategy; 4 drop the product or the entire product line; 5 add one or more products into the line or add new product lines. Evaluation of product/service portfolio 71 I STRONG PRODUCTS II SATISFACTORY PRODUCTS III WEAK PRODUCTS Annual sales growth 20 15 10 5 0 -5 0 5 10 15 20 Annual ROI Figure 4.2 The product profitability grid Source: Kotler (1974)

This model has been characterized as dynamic, incorporating the future orientation of the company, taking into consideration a variety of marketing strategies, competitive activities and changes in the external environment. Market attractiveness – competitive position portfolio model by General Electric/McKinsey Another model developed and popularized by General Electric in cooperation with the leading consulting firm McKinsey is the Business Assessment model or Market Attractiveness – Competitive Position Portfolio classification (Allen, 1979) (Figure 4.3). This model can be viewed as an improvement of the BCG matrix as it is based on a multifactor analysis. More specifically, each product (or SBU) is rated in terms of two main dimensions, namely market attractiveness and business strengths. Each dimension is further analysed in a number of sub-dimensions. For example, market attractiveness may result from market size, contribution margins, number of competitors, and rate of market growth, among others. Similarly, business strengths involve market share, product quality, unit cost, marketing capabilities, brand value, to name a few. Management should identify the most appropriate factors. Then, each of these factors is rated on a fivepoint scale (1: very unattractive, 5: very attractive). Next, the ratings are multiplied by weights representing the factors’ relative importance, and are then added up for each dimension. 72 Product and services management Strong Medium Weak 3.67 2.33 1.00 5.00 3.67 2.33 1.00 BUSINESS STRENGTH Low Medium High MARKET ATTRACTIVENESS 5.00 Invest/grow Selectivity/earnings Harvest/divest Figure 4.3 The GE/McKinsey matrix Source: Day (1986). Reprinted with permission.

Each of the two dimensions of the McKinsey/GE matrix is divided into three categories, namely low, medium and high. This results in a nine-cell matrix. The position of each product in the matrix is represented in circles. The size of the circle reflects the size of the product’s market. A shaded part of the circle can be drawn representing the product’s market share. The McKinsey/GE matrix is divided in three distinctive zones: the three upper-left cells indicate opportunities in which the company should invest/grow. The three diagonal cells (lower left to upper right) reflect moderate attractiveness. Thus, the company should be selective in the investments made. Finally, the three cells at the lower-right end of the matrix reflect unattractive markets in which the competitive position of the company is rather weak. In this case, the company should seriously consider following a divesting or harvesting strategy. The McKinsey/GE matrix suggests certain strategies that the company should pursue depending on market attractiveness and its business strengths. These strategies are as follows: • protect position (high market attractiveness-high business strengths); • invest to build (high market attractiveness-medium business strengths); • build selectively (medium market attractiveness-low business strengths); • build selectively (medium market attractiveness-high business strengths); • selectivity/manage for earnings (medium market attractiveness-medium business strengths); • limited expansion or harvest (medium market attractiveness-low business strengths); • protect and refocus (low market attractiveness-high business strengths); • manage for earnings (low market attractiveness-medium business strengths); • direct (low market attractiveness-low business strengths). Shell International directional policy matrix Another model for evaluating product portfolios has been developed by the Dutch oil company Shell under the name Shell International directional policy matrix (Seidl, 1979) (Table 4.3). This matrix has two dimensions: prospects for sector profitability (horizontal axis) and company’s competitive capabilities (vertical axis). Each dimension is divided into three zones. Prospects for sector profitability may vary from unattractive, through average to attractive, while the company’s competitive capabilities may be weak, average or strong. Thus, the Shell matrix has nine cells with different combinations of prospects for sector profitability and company’s competitive capabilities. Each cell reflects a different strategic option. For example, when the prospects for sector profitability are unattractive, and the company’s competitive capabilities are weak, then the most appropriate strategy is divestment. Ben Enis’s product/market matching matrix In 1980, Ben Enis has developed the product/market matching matrix. This matrix has two dimensions: product life cycle (PLC) stage and market phase (Figure 4.4). The first dimension is divided into introduction, growth, maturity and decline, whereas the latter dimension is divided in new, expanding, stable and contracting. On the basis of this matrix, the company has to select between three alternative strategies: market extension, market development and market exploitation. Enis (1980) notes that many authors hypothesize that the stages of product life cycle and the market stage coincide. In such a case we refer to market development. However, this is not always true. It is possible that due to aggressive marketing the PLC may be pushed ahead Evaluation of product/service portfolio 73

of market stage. For example, a mature product is introduced in an expanding or stable market. This is called ‘market extension’. Similarly Enis also recognizes that the PLC may lag behind the market stage, when, for example, a new product-introduction stage of PLC – is launched in a market that competitors have already entered. In such case, ‘market exploitation’ occurs. Business profile matrix by A.D. Little The leading consulting firm A.D. Little has developed the ‘business profile matrix’ (Wind, 1982). This model which is similar to the BCG Matrix is based on two dimensions (Table 4.4), the company’s/product’s competitive position and the stage of industrial maturity. The competitive position is further broken down into five stages ranging from weak to dominant. The stage of industrial maturity has four steps, namely ‘embryonic’, ‘growth’, ‘maturity’, and ‘aging’. The A.D. Little business profile matrix implies that risk increases as products are aging and competitive position becomes weak. According to this model, there are certain strategies that could be followed depending on the competitive position and the stage of industrial maturity. For example, market penetration is most suitable when industry is in the embryonic or growth stage. Barksdale and Harris model In the classic paper of Barksdale and Harris (1982) in long range planning, a complete model of product portfolio evaluation was presented, which combines the BCG Matrix and the Product Life Cycle Concept (Figures 4.5 and 4.6). This model recognizes the 74 Product and services management Table 4.3 Shell International directional policy matrix Source: Seidl (1979) Company’s competitive capabilities Weak Average Strong Unattractive Disinvest Phased withdrawal Cash generation Average Phased withdrawal Custodial Custodial growth Growth leader Attractive Double or quit Try harder Leader Prospects for sector profitability Table 4.4 A.D. Little business portfolio matrix Source: Wind (1982) Embryonic Growth Maturity Ageing Dominant Strong Favourable Tentative Weak Stage of industry maturity Competitive position

importance of both the initial as well as final stages of the PLC when evaluating product portfolios. Thus, they propose three new categories of products, namely: pioneering products that are called ‘infants’, products with large market shares in declining markets, which are called ‘war horses’ and products with small market shares in declining markets, that are called ‘dodos’. ‘Infants’ are pioneering products that require niche marketing. Usually, they do not generate profits for a period of time, while they require considerable financial resources. In a declining market, ‘cash generators’ (of the BCG model) become ‘war horses’. These successful ‘veterans’ have a strong competitive position in the market and with good management may remain significant sources of cash flow for the company. According to the authors, Maxwell House coffee of General Foods is an excellent example of a ‘war horse’. For many years it maintains a leading position in the instant coffee market and although this market is in decline, Maxwell House remains a successful brand. ‘Dodos’ are products with a small market share in declining markets and offer limited opportunities of generating cash flows. Usually, these products are deleted from the company’s product portfolio. Although competition usually exits the market, it may be profitable for the company to maintain a ‘dodo’ in a declining market. How effective are the models/matrices of product portfolios? A number of researchers have attempted to empirically evaluate the effectiveness of the product portfolio models that we described earlier. In 1983, Wind, Mahajan and Swire used Evaluation of product/service portfolio 75 MARKET DEVELOPMENT Product life cycle stage Market extension Market exploitation Market stage Decline Maturity Growth Introduction New Expanding Stable Contracting Figure 4.4 Product/market matching matrix Source: Enis (1980)

data from the PIMS (Profit Impact of Marketing Strategy) database for fifteen SBUs of companies that belong the Fortune 500 list. Their main findings are summarized as follows: The classification of any SBU or product in a specific product portfolio position such as low market share and low market growth rate (‘dog’) or high market share and high market growth rate (‘star’) depends on the following four specific factors: 1 the operational definition of the dimensions used; 2 the rule used to divide a dimension into categories, like high-low; 3 the weighting of the variables constituting the composite dimensions (if used); 4 the specific product portfolio model used. Any minor change in the aforementioned factors may lead to different classification of the SBU or product involved, and, thus, in different strategies. Actually, only one of the fifteen SBUs that were examined remained in the same category regardless of the changes made in these factors. Consequently, and given the sensitivity of SBU or product classification, it is quite risky to use a single portfolio model as a basis for product analysis and strategy. Wind and his colleagues suggest that companies should examine the sensitivity of the portfolio classification of SBUs or products to various portfolio objectives, definition of variables and weights, as well as the use of hybrid models. Following their recommendations would increase the value of portfolio analysis as an appropriate basis for marketing strategy and may avoid situations like the one revealed in their study, that the same SBU could be classified as a problem child, star, dog or cash cow depending on the model used. In 1994, Armstrong and Brodie conducted a series of laboratory experiments in six countries over a five-year period to investigate whether decision makers might be 76 Product and services management ‘Infants’ ‘Stars’ ‘Cash cows’ ‘War horses’ ‘Problem children’ ‘Dogs’ ‘Dodos’ Low High Low Negative High Low Market growth Relative market share Figure 4.5 Product life cycle portfolio matrix Source: Barksdale and Harris (1982)

misled by portfolio methods when making an investment decision. The two researchers chose an experimental design in which subjects were provided with a particular presentation (Boston Consulting Group – BCG Matrix or Net Present Value – NPV) and were then faced with a choice between two different investment opportunities. To determine whether the BCG Matrix would mislead people, the profitable investment was labelled ‘dog’ (its commercial name was digits), while the bad investment was labelled ‘star’ (its commercial name was sunbars). This study revealed that information about the BCG matrix increased the subjects’ likelihood of selecting the investment that was clearly less profitable. Of subjects who were exposed to the BCG matrix, 63.5 per cent selected the unprofitable investment, while 37.1 per cent of subjects exposed to NPV made the wrong decision. Of subjects who used the BCG matrix in their analysis, 86.8 per cent selected the less profitable investment. In contrast, only 15.3 per cent of those using the NPV selected the bad investment. On the basis of their findings, Armstrong and Brodie (1994) suggested that the BCG model should not be used for product portfolio analysis. This extreme position has been questioned by Wensley (1994) by criticizing both the nature of their experiments and the data analysis method used. More specifically, he argued that Armstrong and Brodie (1994) chose a relatively simple experimental design, and their finding that the BCG treatment generally results in a substantial preference for sunbars is not surprising, since sunbars are somewhat modelled on the BCG ‘star’ category and the digits on the ‘dog’ category. However, Wensley (1994) agreed that additional research is required before one can conclude that matrix techniques indeed improve the nature of decision-making. Financial models of product portfolio analysis As we mentioned at the beginning of the chapter, the financial portfolio theory, as reported by Markowitz (1952) forms the basis for developing models of product portfolio analysis. Using techniques of non-linear programming, Markowitz has shown that, from an available population of alternative investments, an efficient portfolio can be developed. Evaluation of product/service portfolio 77 Entry Time Exit Problem Children Dogs Dobos Stars Cash cows War horses Infants Sales Pioneering Growth Maturity Decline Figure 4.6 Combined PLC/product portfolio concepts Source: Barksdale and Harris (1982)

This portfolio is composed by all the investments that lie in a curve known as the ‘efficient frontier’ of alternative investments (Figure 4.7). In order to identify the ‘efficient frontier’ one should calculate the following: • the expected return of the portfolio measured as the average return of all investments in the portfolio; • the risk of the portfolio measured as the standard deviation or the variance of the portfolio’s return; • an additional risk of the portfolio, measured as the covariance or correlation coefficient between the expected returned of the portfolio’s investments with the expected return of every alternative investment that is available. The first empirical study that explored the feasibility of using concepts from financial portfolio theory to design and manage product and service portfolio has been undertaken by Cardozo and Smith (1983). These researchers found that return and risk measurements of product-market investments demonstrate high positive covariance, and therefore are candidates for use in a consistent constrained optimization approach similar to that developed in modern portfolio theory. More specifically, they concluded that, it is possible to create the product portfolio equivalent of an efficient frontier using non-linear optimization techniques. However, the decision rules from financial portfolio theory need to be modified so as: • to avoid premature divestment of new and growing product lines; • to take into account the discontinuities in abilities of product lines to surrender or absorb resources without jeopardizing productivity of individual product-market investments, and • to provide for addition of new product line. According to Cardozo and Wind (1985), knowledge of the ‘efficient frontier’ can help companies to increase the productivity of their resources. The ‘efficient frontier’ consists of the most productive investment opportunities that are available to the company at a particular point in time. Hence, it constitutes a benchmark against which investments in product lines may be evaluated. Any investment that lies to the left of the ‘efficient frontier’ yields higher returns for similar risk levels, or alternatively lower risk for similar returns. Investments to the right of the efficient frontier offer lower return 78 Product and services management Return Risk d Efficient frontier c a b e f g Figure 4.7 ‘Efficient frontier’ of alternative investments

than other investments of comparable risk or higher risk for investments of similar return. Cardozo and Wind (1985) also introduce the concept of ‘hurdle rate’, which represents the minimum accepted rate of return.1 In some instances, the use of the ‘efficient frontier’ will lead to different decisions from the ‘hurdle rate’ criterion. For example, an investment opportunity may lie below the ‘hurdle rate’, which means that if this criterion is used, this investment should be rejected. However, the same investment may also lie to the left of the ‘efficient frontier’, which means that, on the basis of this criterion, it should be accepted. Ideally, the two concepts should be combined to form a composite criterion in which the hurdle rate is used for low-risk investments, while the efficient frontier is used for high-risk investments. This criterion is more exact than multiple hurdle rates which some companies use (namely, lower for low-risk investments, higher for high-risk investments). In order to improve portfolio productivity, the following process could be used: • Definition of investments that are product-market combinations whose returns are independent of one another. Products may include technologies, product classes, product lines, brands and specific items, while markets may refer to product application segments, geographical areas and individual customers. • Estimation of returns and risks on the basis of managerial judgement, historical performance and forecasts of future performance under different environmental conditions (for example, competitive activities, customer reactions). More specifically, managers should first, forecast return for each investment; and secondly, identify the main factors that affect these returns, construct scenarios around these factors (based on the probability of their occurrence) and quantify these estimations and arrange them in a tabular and graphical form. Further, managers should compute risk, which is the variation in level of return either among sets of environmental conditions, or time periods. For each investment, risk is the standard deviation of the return estimate for that investment, weighted by the probability of occurrence of each return. Once the risk and return have been computed for each investment, those values may be calculated for each set of individual productmarket investments (or business units) that managers consider appropriate. Then, the ‘efficient frontier’ can be plotted through those investments that maximize return for any level of risk and minimize risk for any level of return. • Measurement of portfolio productivity is calculated by adding the average returns of each investment weighted by the resources committed to each of them as a percentage of total resources committed. • Selection of desired sets of investments: if the company wishes to avoid the possibility of large losses, it should select investments on the lower left part of the ‘efficient frontier’. If, on the other hand, the company is willing to bear larger variations in returns, it should select investments along the upper right part of the ‘efficient frontier’. Finally, companies that desire a balanced product portfolio should select a combination of investments from each end of the ‘efficient frontier’ or from its centre. Summary • These are the main approaches of product portfolio analysis, namely the multidimensional ‘screening’ approach, the index approach and the product portfolio classification/matrix approach. • Product portfolio models can be either financial or non-financial. Evaluation of product/service portfolio 79

• The non-financial models base the product portfolio evaluation on a number of key dimensions or criteria, such as market attractiveness, profitability, and relative market share. • The most popular non-financial product portfolio models are the Boston Consulting Group (BCG) matrix, the General Electric (GE) matrix, the A.D. Little matrix, and the Shell International directional policy matrix. • Empirical evidence suggests that non-financial product portfolio models must be used in combination to be more effective. • Financial product portfolio models are based on the financial portfolio theory. • Two basic financial criteria can be used to evaluate product portfolios, namely the ‘hurdle rate’ and the ‘efficient frontier’. • The ‘hurdle rate’ represents the minimum accepted rate of return. • The ‘efficient frontier’ consists of the most productive investment opportunities that are available to the company at a particular point in time. Hence, it constitutes a benchmark against which investments in product lines may be evaluated. • Ideally, the two concepts should be combined to form a composite criterion in which the hurdle rate is used for low-risk investments, while the efficient frontier rate is used for high-risk investments. Questions 1 Write down three reasons why a company should analyse its product portfolio. 2 What are the similarities and differences between the BCG matrix and the GE matrix? 3 Select a product portfolio model and write down all the necessary information you need in order to use it effectively. 4 Describe the process of analysing the portfolio of an automotive company using the riskreturn approach. Note 1 For a detailed example of how one company can use the risk-return analysis, see Cardozo and Wind (1985). References Alexander, R. (1964) ‘The death and burial of sick products’, Journal of Marketing, 28: 1–7. Allen, M. (1979) ‘Diagnosing GE’s planning for what’s watt’, in R.J. Allio and M.W. Pennington (eds), Corporate Planning Techniques and Applications, AMACOM: New York, pp. 211–20. Armstrong, S. and Brodie, R. (1994) ‘Effects of portfolio planning methods on decision-making: experimental results’, International Journal of Research in Marketing 11: 73–84. Barksdale, H. and Harris, C. (1982) ‘Portfolio analysis and the product life cycle’, Long Range Planning, 15(6). Berenson, C. (1963) ‘Pruning the product line’, Business Horizons, 6: 63–70. Boston Consulting Group (1976) Perspectives on Experience. Boston: Boston Consulting Group. Browne, W.G. and Kemp, P.S. (1976) ‘A three-stage product review process’, Industrial Marketing Management, 5: 333–42. Cardozo, R. and Smith, D. (1983) ‘Applying financial portfolio theory to product portfolio: an empirical study’, Journal of Marketing: 110–19. Cardozo, R. and Wind, J. (1985) ‘Risk return approach to product portfolio strategy’, Long Range Planning, 18(2): 77–85. Clayton, H.L. (1996) ‘The pruning of sick products’, Management Accounting, June: 17–18. 80 Product and services management

Day, G. (1986) Analysis of Strategic Marketing Decisions. St. Paul, Minn: West Publishing Company. Drucker, P. (1963) ‘Managing for Business Effectiveness’, Harvard Business Review, 41: 59–60. Eckles, R.W. (1971) ‘Product line deletion and simplification’, Business Horizons, 14: 71–7. Enis, B. (1980) ‘GE, PIMS, BCG, and the PLC’, Business, 30(3). Fluitman, L. (1973) ‘The necessity of an industrial product-mix analysis’, Industrial Marketing Management, 2: 345–52. Hamelman, P. and Mazze, E. (1972) ‘Improving product abandonment decisions’, Journal of Marketing, 36: 20–6. Hedley, B. (1977) ‘Strategy and the business portfolio’, Long Range Planning, 10(1): 9–15. Houfek, L. (1952) ‘How to decide which products to junk’, Printers Ink , August: 21–23. Jacobson, R. and Aaker, D. (1985) ‘Is market share all that it’s cracked up to be?’, Journal of Marketing, 49: 11–21. Kotler, P. (1965), ‘Phasing out weak products’, Harvard Business Review, 43: 108–18. Kotler, P. (1974) ‘Marketing during periods of shortages’, Journal of Marketing, 38: 29–39. Kratchman, S., Hise, T. and Ulrich, T. (1975) ‘Management’s decision to discontinue a product’, Journal of Accountancy, June: 50–57. Markowitz, H. (1952) ‘Portfolio selection’, Journal of Finance, 7 (March). Morrison, A. and Wensley, R. (1991) ‘Boxing up or boxed in? A short history of the Boston Consulting Group share/growth matrix’, Journal of Marketing Management 7: 105–29. Seidl, R.L. (1979) ‘How useful is corporate planning today?’, Corporate Finance Conference, (October), Shell Group Planning Division, Shell International Petroleum Co. Sonnecken, G. and Hurst, D. (1960) ‘How to audit your existing products for profit’, Management Methods: 45–46. Wensley, R. (1981) ‘Strategic marketing: betas, boxes or basics’, Journal of Marketing, 45: 173–82. Wensley, R. (1994) ‘Making better decisions: the challenge of marketing strategy techniques’, International Journal of Research in Marketing, 11: 85–90. Wind, Y. (1982) Product Policy: Concepts, Methods and Strategies. Reading, MA: Addison-Wesley. Wind Y. and Claycamp H. (1976) ‘Planning product line strategy: a matrix approach’, Journal of Marketing, 4: 2–9. Wind, Y., Mahajan, V. and Swire D. (1983) ‘An empirical comparison of standardized portfolio models’, Journal of Marketing, 47: 89–99. Worthing, P. (1971) ‘The assessment of product deletion decision indicators’, in T.J. Schreiber and L.A. Madeo (eds), Fortran Applications in Business Administration. Graduate School of Business Administration, University of Michigan. Further reading Aaker, D. (1992) Strategic Market Management. John Wiley & Sons. Walker, O., Boyd, H. and Larreche, J. (1999) Marketing Strategy: Planning and Implementation. Irwin Mc-Graw Hill. Evaluation of product/service portfolio 81

Introduction The development of new products and services is one of the most critical decisions that a company may make as a result of evaluating its product portfolio. New products and services can actually be viewed as the main drivers of surviving and succeeding in the market. Because of the critical nature of new product/service development, the scientific community around the world has turned its attention to the process of developing new products and services. As a result, a considerable number of models are available in the literature about the steps followed and the subsequent decisions made during the process of developing new products and services. In this chapter, we will answer the following questions: • What are the processes or models for developing new products and services? • Which are the alternative types of new product/service development processes in terms of parallel or sequential execution of activities? • What models could a company use for managing its new products/services portfolio? How often are they actually used and how effective are they? New product development models The development of new products has been the subject of research in various scientific domains such as management, industrial design and engineering, and marketing. Depending on the domain, new product development (npd) models give emphasis to different stages or activities. For example, the npd models that are drawn from the management domain underline the managerial procedures or activities, while the npd models from the industrial design domain place emphasis on the technicalities of the development process. Basic model The most popular new product development model, by far, has been proposed by the consulting firm Booz, Allen and Hamilton Inc. (BAH). Thirty years ago, they surveyed a 5 New Product/Service Development and Portfolio Models

New product/service development and portfolio models 83 sample of US manufacturing firms regarding their new product development practices (Booz et al., 1968). They were the first to suggest that a systematic process exists or should exist in the development of new products. Undoubtedly, the work of BAH is one of the most significant contributions to the management of new products. Their initial model consisted of six steps: 1 Exploration – the search for new product ideas to meet company objectives. 2 Screening – a quick analysis to determine which ideas are pertinent and merit a more detailed study. 3 Business analysis – the expansion of the idea into a concrete business recommendation including product features and a programme for the product. 4 Development – turning the product idea into a ready-made product, demonstrable and producable. 5 Testing – the commercial experiments necessary to verify earlier business judgements about the product. 6 Commercialization – full-scale production and launching of the product into the market place. In a later study, Booz et al. (1982) added one more step at the beginning of the process, that of New Product Strategy Development, providing a seven-step model. During this stage, the company identifies the strategic business requirements that the new product should satisfy. New product development models from the management domain In the management domain, Tushman (1977), based on previous work of Marquis (1982), makes a distinction between the different phases that occur within the innovation process: • idea generation; • problem solving and • implementation. During the first phase the new product idea is generated. Problem solving involves the technical activities that transform the product idea into a fully developed product, whereas implementation includes pilot production, testing and market introduction of the new product. A few years later, Burgelmann (1983) characterized innovation process as ’the internal corporate venturing (ICV) process’. This ICV process includes the following four stages: • conceptual (idea generation); • pre-venture; • entrepreneurial (product development) and • organisational (implementation). According to this model, in every stage different actors participate and activities take place at different levels in the organization, simultaneously as well as sequentially. On the same grounds, Van de Ven et al. (1989) describes the innovation process as a sequence of three distinct stages: • the idea stage; • the design (or development) stage and • the implementation stage.

New product development models from the industrial design domain In the design and engineering domain, Pugh (1983) has developed the ‘Design Activity Model’, which begins and ends in the market. It recognizes that design is an iterative process and that the interfaces between the different activities are critical to the outcome of the design activity. The major steps of this model are: • market; • specification; • concept design; • detail design; • manufacture and • sell. Similarly, Pahl and Beitz (1984) argue that an iterative process exists by placing loops between the activities. These activities are: • task clarification; • conceptual design; • embodiment design, and • detail design. New product development models from the marketing domain In the marketing domain, Kotler (1980) suggests a development process of eight major stages: 1 idea generation; 2 idea screening; 3 concept development and testing; 4 marketing strategy; 5 business analysis; 6 product development; 7 market testing; 8 commercialization. It is obvious that Kotler bases its model in the work of Booz et al. with the difference that he is the only researcher who explicitly refers to the creation of a marketing strategy for the new product in a separate stage of the innovation process. In addition, Cooper and Kleinschmidt (1986) investigated the new product development activities of 203 projects. Drawing upon a variety of new product development models, they developed a process model that comprises the following thirteen activities: 1 initial screening; 2 preliminary market assessment; 3 preliminary technical assessment; 4 detailed market study/market research; 5 business/financial analysis; 6 product development; 7 in-house product testing; 8 customer tests of product; 84 Product and services management

9 test market/trial sell; 10 trial production; 11 pre-commercialization business analysis; 12 production start-up; 13 market launch. A more limited view of the development process is taken by Urban and Hauser (1993), who distinguish five key stages: • idea development and screening; • business and market opportunity identification; • technical development; • product testing, and • product commercialization. This model also has a strong resemblance to the other models available in the literature. The only difference is that, it combines idea generation and screening in one stage and it makes no explicit reference to the new product strategy development and marketing strategy. New service development models A number of new service development models have been proposed in the literature (Donnelly et al., 1985; Bowers, 1986, 1989; Johnson et al., 1986; Scheuing and Johnson, 1989a, b). The differences in the development of new products and services stem from the special characteristics of services, i.e. intangibility, inseparability, heterogeneity and perishability. These characteristics can impact new service development, thus special attention is given to the execution of particular activities (Easingwood, 1986). de Brentani (1991, 2000) provides a discussion of how differences between manufactured goods and services might affect new service development. The main points of this discussion are as follows: • Because of intangibility, new service ideas remain conceptual throughout the newproduct development process, which means that uncertainty about the exact nature of the service and, therefore, its risk of failure remain high. In order to tackle this problem, service providers should undertake detailed service blueprinting. Further, as services are mainly intangible, they are not patentable. As a result, they can be more easily imitated by competitors. In an attempt to avoid immediate service imitation, service providers often bypass the testing stage, which can increase the risk of failure. Finally, customers have greater difficulty visualizing intangible offerings. Therefore, when launching a new service, the firm must provide certain physical clues that describe the new service, so as it can be made less abstract and less difficult to perceive and evaluate. • In services, production and consumption occur more or less simultaneously. Hence, the interaction between the customer and the service provider during service delivery is critical. Front-line personnel not only need to know the characteristics and features of the new service, but they also have to be motivated to promote it to customers. However, front-line personnel usually view another service offering as simply added workload (Easingwood, 1986). Thus, a new service launch programme requires both external and internal marketing planning. • Service heterogeneity which results in variations between the actual service outcome and the customer’s experience at each purchase occasion, also influences new service New product/service development and portfolio models 85

development. For instance, during the development (or design) stage, much of the effort is directed to planning and controlling for the level of variation in the service outcome(s) at various points in the service delivery process (Shostack, 1984). This allows for a much greater level of fine-tuning the new service both to customer needs and to provider resources. • Because services are perishable, that is, they cannot be produced in advance and then be kept in stock, this may create overcapacity problems during purchase lulls, while potentially strapping the organization to capacity when demand is high. Firms often respond to this problem by service-line additions that will make use of existing operating and delivery systems during periods of low demand and/or offer alternate, peak load versions of a service when the company is strapped to capacity (Berry, 1980). Some large hotels in the Mediterranean, for example, have added spa and body care services in order to make use of some of their underused capacity during the winter period, while during the summertime (period of high usage), they mainly promote the ‘sea and sun’ concept. The most analytic model of new service development has been suggested by Scheuing and Johnson (1989a, b). This model is based on the extensive body of literature dealing with new product management and a number of in-depth interviews with senior executives in service firms. More specifically, it is characterized by a fifteen-step sequence of activities (Figure 5.1). The major steps of the npd models have been retained, but the sequence of activities in this proposed model goes beyond existing models as it looks separately at the design of the service and the design of the delivery process. The fifteen activities of the Scheuing and Johnson’s model can be grouped into four distinct stages: • Direction: this stage includes three activities: the formulation of new service objectives and strategy, idea generation and idea screening. Direction is the outgrowth of the firm’s marketing objectives and a detailed environmental analysis. Internal and external sources of new service ideas provide the input to idea generation and screening. • Design: this stage comprises eight activities (from concept development to personnel training). More specifically, it involves concept development, in which the selected ideas are translated into full product concepts with the help of input from prospects and the company’s customer contact personnel. Next, during concept testing customer’s reactions to service concepts are examined. This activity helps eliminate ideas that are not considered attractive by potential customers. Business analysis follows which represents a feasibility study of each concept. It comprises a complete market assessment and budget development for each proposed new service concept. The next activity refers to project authorization, when top management commits resources to the development of a full service. What follows is service design and testing, an activity that requires input from both operations personnel and potential customers/users of the new service under development. Closely linked to this activity is process and system design and testing. The delivery process is designed and tested in detail in order to ensure proper provision of the new service to the customer. Next, a marketing programme must be designed and tested for potential customers. At the end of the design stage, all personnel must follow training seminars on the nature and operational details of the new service. • Testing: this stage includes three activities. First, a service testing is undertaken to determine potential customers’ acceptance of the new service. Secondly, process and system design and testing in the form of pilot runs ensure the service’s smooth functioning. Thirdly, test marketing examines the marketability of the new service and field tests its 86 Product and services management

New product/service development and portfolio models 87 Marketing objectives Internal sources Customer contact personnel Budget development Operations personnel All personnel Users Users Users Environmental analysis External sources Prospects Market assessment Formulation of new service objectives and strategy Idea generation Idea screening Concept development Concept testing Business analysis Project authorization Service design and testing Process and system design and testing Marketing programme design and testing Personnel training Service testing and pilot run Test marketing Full-scale launch Post-launch review Figure 5.1 Scheuing and Johnson’s normative model of new service development

marketing programme with a limited number of customers. Completion of test marketing is followed by a review and corrective actions in the marketing effort. • Introduction: in this final stage of the new service development process, a full-scale launch is initiated, introducing the new service to the market. A post-launch review follows, with the aim of investigating whether the new service objectives are being achieved or alterations are needed. Types of new product development models In the previous sections we described the activities/stages of developing new products and services. An equally important issue refers to the sequence with which these activities/ stages are undertaken. Cooper (1994) distinguishes between first, second and third generation new product development process models. The first two generations describe stage-gate systems that are steadily evolving into the third generation new product processes. First generation stage-gate models The first generation product process was NASA’s Phased Project Planning, developed in the 1960s. It was also called Phased Review Process, which broke product development into discrete phases. There were review points at the end of each phase. For instance, funding for the next phase was subject to certain prerequisites that had to be met, typically that all tasks had been satisfactorily completed for the previous phase to move to the next one. This method was rather a measurement and control methodology designed to ensure that the project was proceeding as scheduled. The process was engineeringfocused since it was solely dealing with physical design and development. Marketing was absent from the development efforts, which were mainly technical, rather than business-oriented. The first generation npd model was a more disciplined way of carrying out innovation activities compared to ad hoc development processes applied in previous years. Nevertheless, the Phased Review Process was cumbersome and slow. It had a narrow scope as it dealt with the actual development phase only, and also, it was monofunctional as it was assigned to engineering team of the company. Second generation stage-gate models A stage-gate system of the second generation is described as a ‘game plan or blueprint’ for improving the effectiveness and time efficiency of the new product process (Cooper and Kleinschmidt, 1991). In Figure 5.2, a second generation stage-gate new product system is depicted. The main characteristics of such systems are as follows: 1 The innovation process is broken down into a standard series of stages, with each comprising a number of activities (namely, a cost/benefit analysis or a market study of user needs and wants). 2 The stages transcend functions and involve marketing, R&D, manufacturing and others in every stage. In other words, the development of new products becomes a cross-functional task. 88 Product and services management

3 Stages are separated by go/no go decision points (or gates), which serve as review stops for the new product under development. Quality of execution checks are performed on the basis of a predetermined list of criteria. If the product meets these criteria then it moves on to the next stage, otherwise it is ‘killed’. 4 In stage-gate systems of product development, the process is monitored by a crossfunctional team headed by a project leader/champion. 5 Parallel processing of activities as well as speed in development also characterize these systems. Timely gate decisions keep the project moving along. Effective project evaluations focus resources on the promising projects, while quality control checks ensure that the new product project is well executed. Although, the second generation new product process is surely more efficient than its predecessor, it has certain weaknesses too. For one thing, development activities are executed in parallel only within each stage. In that sense, projects must wait at each gate until all tasks have been completed and overlapping of stages is impossible. As a consequence, the projects must go through all stages and gates which may lead to unnecessary resources spending when a shortcut is more appropriate (namely, when developing close-to-home products). Moreover, the second generation system does not allow for project prioritization and focus as they pay little attention to resource allocation questions. Finally, it has been accused as being highly detailed and bureaucratic, causing conceptualization problems to managers. Third generation models The third generation models have been proposed as a way to deal with the deficiencies of the second-generation stage gate systems. Figure 5.3 represents graphically the concept of such models. A third generation model has four fundamental characteristics (Fs): 1 Fluidity: it is fluid and adaptable, with overlapping and fluid stages for higher speed. 2 Fuzzy gates: it features conditional Go decisions, rather than absolute ones, which are dependent on the situation. 3 Focused: it builds on prioritization methods that look at the entire portfolio of projects, rather than one project at a time, and also allocates resources on the meritorious ones. 4 Flexible: it is not a rigid stage-gate system, as each project is considered unique and has its own routing through the process. New product/service development and portfolio models 89 Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Idea $ Preliminary investigation Detailed investigation (business case) preparation Development Testing and validation Full production and market launch Initial screen Second screen Decision on business case Postdevelopment review Precommercialization business analysis Post implementation review Figure 5.2 Overview of a second generation stage-gate new product system Source: Cooper and Kleinschmidt (1991)

These four facets of the third generation process have a positive effect on the development of new products. However, Cooper (1994) recognizes that a fifth F also exist. It’s Fallibility or failure. This advanced system introduces much more freedom and discretion to project leaders and development teams, which increases risk. This new process is also more sophisticated and therefore, it requires a more experienced, professional approach. Managers wishing to adapt such a system must bear in mind these words of caution before they expect to solve all their npd problems through the implementation of a third generation process. Portfolio management models for new products The technological advancements, intensity of competition and globalization of markets make new products critical for creating and sustaining a competitive advantage. However, corporate resources are scarce, and they need to be allocated effectively to achieve new product objectives. Portfolio management allows the company to allocate these resources and optimize its new product investments by defining the right new product strategy, selecting the most promising new product ideas and achieving the ideal balance of new product projects. Cooper et al. (1998, 1999, 2000, 2001) have published extensively on this issue on the basis of an empirical study in 270 companies. Their research revealed a number of models of new products portfolio management. These authors include this task in their stage gate process for developing new products, and they relate it to ‘Gate 2’ which comes before the detailed investigation stage or alternatively ‘Gate 3’ after which the product could move to the actual development stage. According to the authors, portfolio management for new products goes beyond idea and project selection for further development and the go/no go decision in the various ‘gates’ of their npd model. More specifically, they define portfolio management as: A dynamic decision process, whereby a business’s list of active new products (and R&D) projects is constantly up-dated and revised. In this process, new projects are evaluated, selected and prioritized; existing projects may be accelerated, killed or de-prioritized; and resources are allocated and re-allocated to the active projects. 90 Product and services management Stage 1: preliminary investigation Stage 2: detailed investigation Stage 3: development Stage 4: testing and validation Stage 5: full production and market launch Post implementation review Gate 5 Gate 4 Gate 3 Gate 2 Gate 1 IDEA $ Figure 5.3 Overview of a third generation new product system Source: Cooper (1994)

In the following sections, we present some interesting results of Cooper et al.’s study which refer to first, the goals of portfolio management for new products; secondly, the tools and techniques for achieving these goals; thirdly the frequency with which the various tools are used; fourthly the effectiveness of these tools; fifthly the behavior of best performers as far as portfolio management is concerned. Goals of portfolio management for new products There are three main goals of managing a portfolio of new products: 1 Maximizing the value of the portfolio: this goal aims at allocating resources so as to maximize the value of the portfolio against one or more corporate objectives (e.g. profitability). 2 Achieving a balanced portfolio: this goal seeks to obtain a desired balance of new products projects in terms of certain parameters, such as durability of competitive advantage (short-term, long-term), risk (high, low), markets, product categories, technology, and so on. 3 A strong link to strategy: this goal aims at ensuring that first, the final portfolio of new products reflects the corporate strategy, secondly, the breakdown of expenses across projects, products, markets, and so on is directly tied to corporate strategy and thirdly, all projects and products are on strategy. Methods of portfolio management for new products In this section, we present the methods, which are used, in relation to the aforementioned goals. Maximizing the value of the portfolio A number of financial and non-financial tools and methods are used to achieve this goal. The financial methods include the net present value, the expected commercial value, the productivity index, and the dynamic rank ordered list. The non-financial methods comprise scoring models, checklists and paired comparisons. Financial methods for portfolio value maximization Net present value is calculated when the present value of the future cashflows1 is estimated after subtracting the initial investment made. Expected commercial value (ECV): aims at maximizing the value of the new products portfolio subject to certain budget constraints. According to Cooper et al. (1998), this approach is one of the most well thought out financial methods, which introduces in the analysis probabilities of technical and commercial success. For calculating the expected commercial value of a new project/product the following must be taken into consideration: • The development of a new product has a cost (D). • In case a new product is considered an absolute technical failure, it is not considered for further development. In every other case, it proceeds to commercialization, subject to a probability of technical success (Pts). New product/service development and portfolio models 91

• If the new product is technically successful, it moves into commercialization, bearing the capital and marketing costs (C). • There is always a probability of commercial success (Pcs). In this case, the company will gain profits (sales minus costs) which can be translated into net present value (NPV). • The new product’s strategic importance (SI) for the company could also be incorporated in the evaluation of the expected commercial value of the new product. Based on the above discussion, the formula for the ECV is as follows: ECV = [(NPV × SI × Pcs) − C] × Pts − D After calculating the expected commercial value for each new product/project, the company should decide which of these new products/projects would be included in its portfolio. This decision should be based on both the ECV and the budget constraints or scarce resources of the company (for example, R&D funds, capital investments for capital intensive projects or work months for labour intensive projects). The company should divide the ECV by the constraining resource (for example, R&D pending). Projects are then rank-ordered according to this ratio. Further, the company should calculate the sum of R&D spending for each project starting from the first rank-ordered. Those projects that cover the available R&D spending limit are included in the portfolio, while the others are placed on hold. Productivity index is another financial method for maximizing the value of a new products portfolio, which has been popularized by the strategic decision group (Matheson and Matheson, 1994). This index is derived from the following formula: PI = [NPY × Pts − R&D]/R&D where PI: Productivity index NPV: Net Present value Pts: Probability of technical success R&D: R&D costs remaining in the project (alternatively total costs remaining can be used) New products or projects are rank-ordered according to this index in order to arrive at the preferred portfolio. Dynamic rank ordered list: according to this value maximization method, new products or projects can be rank-ordered according to several criteria concurrently without becoming complex and time-consuming. Such criteria include net present value, return on investment, strategic importance, probability of technical or commercial success and so on. Tables 5.1 and 5.2 presents an example of the dynamic rank ordered list prepared for a hypothesized company. The criteria used by this company to rank order new product projects are return on investment, new present value, strategic importance and probability of commercial success. In order to rank-order projects, the probability of commercial success is multiplied by each of the return on investment (ROI) and net present value (NPV) yielding the adjusted ROI and the adjusted net present value. Then, the projects are ranked according to each of the three criteria ROI, NPV and strategic importance on a five point scale (1: not strategically importance, 5: strategically important). The overall ranking of each project is calculated by the mean of the three rankings. In our example, Zeus product was ranked first on ROI, first on NPV and second on strategic importance. Hence, the mean of these three rankings is 1.33 and this product is placed at the top of the list. Similarly, Apollon comes second, while Aphrodite is ranked third. 92 Product and services management